JELD-WEN Holding, Inc. (JELD) Earnings Call Transcript & Summary

All right. Well, good morning, everyone, and thank you for joining us. I'm Susan Maklari, the Homebuilding and Building Products analyst here at Goldman. And I'm delighted to be joined today by Gary Michel, the CEO and Chair of JELD-WEN. Welcome. We're happy to have you.

Thank you. Thanks for having us.

Today's session is going to be in the form of a fireside chat. We will take questions towards the end. I'd also just like to quickly make you aware of the disclosures that are available if you're interested in those. So with that, welcome, Gary.

Thank you, thanks. Good to be here.

Of course. So I guess, why don't we start by talking about demand because that's been a huge, huge topic in your industry, obviously, with all the sort of macro crosscurrents that are happening. Talk a little bit about what you saw in the first quarter and how you're thinking about things.

Well, we continue to see a pretty robust home market -- homebuilding market for sure and R&R market, really across all 3 of our segments, which are North America, Europe and Australasia. A little dip in the first quarter in Australasia due to some weather, but the demand from a supply standpoint. But from a demand standpoint, continue to see housing strong there. In Europe, a little bit of a headwind due to the Ukraine war and kind of some projects being pushed out in the northern region, but there's some really robust markets still going on in Europe. And then North America, just keeps -- we just keep seeing demand for residential new construction and R&R and continue to see strength there through the first quarter and the rest of the year.

Yes. Okay. When we think about North America, you commented on the call that your backlogs are really at record levels, especially relative to where we've been in the last 2 years. Talk a little bit about what's driving that. And how you're thinking about your ability to work through that and what it might mean from a volume perspective.

Sure. I report backlog -- strong backlogs because it kind of underscores the demand piece. Obviously, we work diligently to get those backlogs down, turn it into revenue and satisfy our customers. One of the good things for us is we've been really on an operational -- we've been improving our operations really the last several years. It's been one of the mandates since I started with JELD-WEN a few years ago, of really stabilizing our operations, turning them into a competitive advantage, where we were able to turn -- the way you see that is in the lead times that we have for customers, turning that into growth and opportunity to gain share. We've really done that. I think we've got a competitive advantage in our operations today. We don't talk about outages there at all. And we've seen sequential improvement in our throughput really every period for a long time with the dip in last third quarter due to some of the Delta COVID issues. But since then, we've been an improving quarter much -- day-by-day, week-by-week, quarter-by-quarter. And the interesting thing for that is as demand continues to be strong, we continue to get more demand because we're able to have competitively advantaged lead times as well.

Yes, yes, yes. Absolutely. And obviously, inflation, supply chain has been a big focus this year. Talk a little bit about what you're seeing from that perspective. And you've also done some work on the supply chain and sourcing and those kinds of things to help.

Yes. I would say, let's start with the supply chain piece. I can say today that there's no real supply issues that are causing customer delivery. I mean some lead times are affected by our availability of some materials. But for the most part, at any given time, we're always working through supplier pieces, and they're just heightened right now because everybody's got certain constraints. I mean there are a couple of commodities that -- or products that we're working through. But we've been able to, through resourcing, insourcing and even some substitution, take care of that and ensure that we're meeting our customers' demand. the inflation side is a little bit different. That's where it costs us a little bit more to do that. It shows up in freight costs, expediting costs, or cost of materials themselves, plus the general inflation that's been going on, which we have been able to price into the market.

Yes. You talked about this whole journey that you're round around JEM and this process improvement kind of focus that you've gotten. And when you first came to JELD-WEN 3 years ago, 4 years ago now, I guess.

It'll be four years in June, yes.

Yes. One of the things that you said was, first, you had to sort of do some underlying work around the location of some facilities and sort of rejiggering things, if you will. When you step back, where are we in this whole process? Is a lot of that sort of done and we're almost under like the second phase of this now? Where are we?

Yes. I mean it's always -- you've caught -- you've had me -- you asked me this question before. I've always told you, I'll always answer it the same. We're always in the early innings, right? So I always like to say that. But I would say that when I first got there -- really, the team that we put together, first got here, we were really focused on stabilizing operations with the intent of turning them into a competitive advantage, which we have. We also saw that we had probably too much footprint, and we had an opportunity to rationalize and modernize our operations, and we did a great job. We committed to taking about $100 million out of cost through rationalization and modernization. We did that. And we're kind of in the second phase of that. There's still more work we can do, and it's a benefit. But the reason we can do it is because of the deployment of JEM, our lean deployment, where we were able to improve cycle time and add capacity through doing that. And then when -- and we've put standard work across our processes. So when we do have additional capacity now that we've created in facilities, we can now take other latent capacity out, still continue to improve what's left. So we're continuing to take older, less modern factories out of the portfolio in favor of the model value streams that we've got and the places that we continuously improve.

Yes. And as the step-up in the underlying housing environment, whether it's the R&R or the new construction side, has that changed the plans or the process at all in terms of how you're implementing some of that?

Not really. I mean, from a JEM standpoint, all the more reason to do it, right? The -- we probably took -- we took a little more critical approach and maybe prioritization approach during the last couple of years. When demand was so high, you definitely don't want to take capacity out when you're serving customers. Even if it's not the most efficient capacity, it's capacity that you can be serving customers' needs with and grow with. So we've been real cautious about that, making sure that we had the additional capacity and throughput in the receiving plants before we take anything out. So we're kind of accelerating that process now of taking out some of that capacity now that we're able to meet demand through the remaining facilities.

The other thing that you're doing is you're launching some new products, including in windows. And has the process improvements that you've realized and the things that you've learned over the last couple of years, has that improved the rollout of this new product? And has it changed the way you sort of bring it to the market and think about getting it in there?

Well, sure. I mean kind of the -- if you think back to the question you asked earlier, first, stabilize and turn our operations into a competitive advantage. The second piece of that has been really around customer experience and customer -- work around our commercial excellence, which was kind of the next layer. And the third layer, which take -- took a little longer, but is one that we're now seeing the payout this year from is innovation and new product. So a new product that we're launching, we're in the process of now shipping is our Auraline Composite Window and Patio Door business, for example, which took time to start from really nothing to a full new product line with new operations. Great opportunity for us to expand in a growing marketplace that's really underserved and one that we think we can make a real big difference on a sustainable product, very pleasing for customers, high demand for it, and we'll start to produce that. So I think the fact that our operational capabilities were there, we were able to identify and work with our customers through our commercial excellence programs allowed us to do that. Additionally, some other growth levers that we've got, VPI, our multifamily business, now with the expansion to the East Coast. Again, working with customers, moving with our customers to East Coast. We've sold out our first line in that new factory, and we're investing in building up that factory with additional lines.

You're also introducing some newer products within doors as well. Talk a little bit about the issues that you're helping your customers solve with this new product, especially when you think about the builder side and how you can continue to sort of partner with them and leverage some of those?

So you're talking about our entry-level fiber glass door business, which we, a couple of years ago, will admittedly tell you we were under-indexed in. I mean that's a nice way of saying we really weren't a player. And so we started talking with our customers and channel partners, trying to understand how we could change that business and play there. And what we learned was, number one, modernize the product line, have pleasing, contemporary products, but also solve some of their problems around labor availability, particularly skilled labor. The entry door systems tended to be erector sets for builders, where they get all the pieces and components, put it together, and that took a lot of time to do. And if we could solve that installation problem for them, better value for us, value for them. And that's what we did. We introduced this concept of door systems, and we sell a lot more door systems today. We're -- so much so that we're actually adding capacity both on the East and West Coast in order to serve it.

Yes. And so when we think about your capacity, at your Investor Day, you talked about having these 14 sort of innovative model kind of factories, right, 6 are in the -- or 8 are in the U.S.?

Yes, the -- yes, we're up to 20 now. So it's -- yes, they're spread pretty evenly around the world.

Yes, yes. So tell us a little bit...

I'm not going to name them, but...

That's okay. That's okay. But tell us a little bit about that initiative. And obviously, you're continuing to already expand it and so what you're learning with that?

Yes. So what -- one of the things that we wanted to do with the deployment of JEM was to have model value streams, model sites where -- these are places where not only is standard work, install we're continuously improving, and we've got the right people and the right processes in place. But they are representative of the work we do across our system, across the enterprise in around the world so that we can try things there. And then use those in other facilities -- the learnings across other facilities. And what we're doing now is we're actually taking a little broader approach and saying, not just by site, but looking at similar sites and putting them kind of into a family of -- a product line family and really looking at that full value stream for the family. Because what we learn in 1 factory or 1 location then becomes backwards installable elsewhere, and we get a faster take-up of improving the entire product line, adding throughput and quality and cost for all of those. So it's just -- it's been a little bit of an evolution, but part of it is really understanding what's the core operations, what are the core things we need to know in order to operate and continuously improve the business.

And one of the things I feel like when we talk a lot about this, we sort of think about it holistically in the whole business, right. But are there differences in windows versus doors in terms of what you're trying to do because the manufacturing process is obviously quite different in there.

Actually, no. I mean we're trying to improve cycle time. The basis of lean deployment is improve your cycle time. When you do that, a lot of great things happen, right? You get productivity. You can gain share because you have additional capacity, quality tends to be improved. You're looking at safety. We're doing all of that across any operation. Depending on how automated or not a process is, depends on how much you can affect something in a shorter term versus a longer term. We obviously want to take out repetitive manual operations in any -- regardless if its doors or windows, and ensure that we've got really value-added steps. So take out all the nonvalue-added steps, make sure we're -- we've got value-added steps. And in the process, improve the cycle time every single way. So we've done it. We started in some of our vinyl window businesses out of necessity a few years ago, and it really paid off. But we have been modernizing and working in door businesses as well.

Yes. You also mentioned on your earnings call the smart factory that you're starting to have. Talk a little bit about that and what that is.

So yes, one of the great things, at, while I'm pretty much a visual management kind of guy, and I don't want a lot of sensors and things, measuring things. It's kind of cool. We're able to take visual management a step further, where the people that need to see what's going on in a facility -- you want to go to the [ Gamba ]. You want to go to where the work's done. But through pandemic, what we've learned is there's a lot of ways for us to look at and get ahead of trends and things that are happening, particularly in process facilities. So we've been able to do that. We're demonstrating that in one plant, where it's really a huge improvement in our OEE and our ability to get preventative maintenance to places where we need it to go, where we might not have otherwise seen something brewing and get ahead of that problem is really what's kind of coming out of that. But it's also great, we can see what's going on in a plant from afar which became a necessity during the pandemic. And now we've kind of turned that into something that we can use to ensure that we stay ahead of any issue brewing if we see it or it's even if a plant, leadership team sees it.

Yes. And I mean, if we think back a couple of years ago, right, there were certain operational issues that came up that would have implications for the business, and we really haven't seen those in quite a while.

No. And that's part of it. Part of this has been just really looking ahead. I mean, part of it is just deploying our operating system in the way that the leadership teams in the plants now -- they're now attending to those things. But the other piece is, the smart factories give us that opportunity to really look across and to collect data that keeps -- lets us be a little more preventative, I guess, or forward-looking.

You speak a very different language in a sense than a lot of your building product peers, right? You're so much deeper into some of the lean initiatives and some of those things, it seems, than some of the others are in your space -- broadly in your space. What does that mean in terms of taking what you're trying to do and bringing it either to the end markets, right, whether it's the retailers or the builders or whomever that end customer is? And also in terms of the inputs, right, the supply chain, as you think about where you're sourcing from? Are there challenges on those sides because you're doing this in a different way than a lot of others are?

So we -- thank you for calling me different.

In a best way possible.

No, it's good. I take it that way. The -- from the backgrounds that I come from and a lot of the people that we have at JELD-WEN, having great operations, operational excellence is an essence of solving your customers' problems and taking care of customers. It's what enables you to grow your business. And ultimately, I think that's what most companies have, a desire to grow better than the market and to improve your margins. But solving customer problems, taking care of customers is really the essence of where we are and being a place that people want to work. So a great lean environment is one where when we do a deployment in a model value stream, we see a significant increase in employee engagement as well. So we want to be a place people want to work. We want to be a place people want to buy, and that in turn turns into being a better investment as well for our shareholders. So when I think about the building products space in general, yes, we want to be the best in our space, and we're working to do that. But we want to be a great operator period, right? So we want to be able to get measured against the best industrial operators that are out there, not just against the best building products people because I don't think that bar, as you said, is that high. Right now, it's about having your products and services available for customers when they need them. But if we could continue to move that bar forward, I think we'll win in the marketplace and our customers will find value in that.

Yes. The day you start getting calls from some of your building product peers is the day we'll know you've really -- they're like, Gary, how are you doing all of this?

Yes. Well, we're -- like I said, we're in the early innings.

Yes. Yes, you are. You absolutely are. One of the things, when you think about these industrial businesses and these people that have really embraced lean, they've become incredibly working capital efficient as part of that. Talk about what that could mean for JELD-WEN over time and how you think about the opportunities there.

Sure. So we're already seeing some of that, where a lot of the work that we're doing, the rapid improvement events or Kaizen work that we do isn't very capital intensive. You get to a point where you can improve the business through -- it becomes this virtual cycle of just people getting involved and understand how to solve the -- people close to the work know how to solve that problem. And they do it, and it doesn't take a lot of capital to do it. They become very clever and very involved. Now we do want to spend capital when it's appropriate. So capacity expansion and VPI, adding a new factory, a new product line like Auraline, that's where we want to spend money, growth opportunities. We don't want to particularly have to spend it on cleaning up something that's a problem, right? And -- so we want to stay with value-added investment, which we continue to do. But the beauty of getting people involved in solving their problems every single day is that the intensity -- the capital intensity actually goes down and you get bigger improvements because people are engaged in it every day.

Yes. And some of these guys can actually get to be working capital negative on some other products and some of their lines. Do you think you can get there eventually?

Well, there's a lot that goes into that. I've run a business. I took -- did take a business there in my history there. And it's an interesting thing, but it's looking at the value stream, and to answer the rest of your question, from end-to-end, right, and understanding all the way from the supply chain, all the way through to the customer. And it plays into your ability, everything from how you sell the product, how you work with your channel partners all the way back through the supply chain in order to get to that. I'm not going to put that stake in the ground and say that's where we're going today. But yes, that's the benefit. Your working capital improves significantly.

Yes. Yes. No, absolutely. Turning back to thinking about the margin progression, right? You targeted this 15% EBITDA margin. As we start to see some of these initiatives come through, talk us through those steps of how you're thinking of getting from the sort of 11% -- 10%, 11% for this year to that 15% over time.

So if you continue -- you see the work that we're continuing to do on our modernization and rationalization program. So on the cost side of things, we'll continue to work that at about the same pace that we've been -- we did over the last 3 years. So that's certainly one piece of it. Obviously, there's some price that plays into that, which we've seen. That lever has been a little bit different since our Investor Day, but still -- and the right thing. But then when we look at the focus on our commercial excellence and ensuring that our margin profiles are correct, and where we are growing is the right places, that plays in. And then adding products that are margin accretive, things like Auraline, the VPI business or entry. All of these things, when you hear us talk about innovation and capacity expansion, what you should be hearing as well is margin expansion because that's really what this is about.

Yes. The other thing that you mentioned is price, right? You've seen a lot of price over the last year. So how do you think about the continued ability to get price in the market? Has it caused any implications in terms of mix shift? And as things do eventually normalize potentially, how do you think about the stickiness of some of that pricing?

Yes, I want to -- so let's start with the last part first. We've been working on price well before the pandemic started and certainly before last year when all the inflation hit. One of the interesting things about our product categories is they had lagged behind the value equation since the last downturn. And we've been working pretty diligently proving the value points and why we should get more value for our products. And that has been successful, and we had been working on price for a while. Inflation just exacerbates that. So I think we've gotten to a place where we're starting to -- we're able to still get price because of both, right? There's value in the product, there's value in what we sell and how we sell it and the inflation, we've got to get paid for that as well. So I think there's still opportunity there. We -- with the most recent inflation, we've been able to price that out, and that's already in our performance for this year -- will be in the performance for this year. On the stickiness, when it happens is, again, demonstrating the value of the entire experience with JELD-WEN or around our products, will be what determines where the price point lands. I would expect that we would be able to hold on to it. The one place where -- the one place that probably moves around a little bit is around freight. And that one, while I don't think there's a -- it's not part of the value equation per se, but it's one that probably moves a little bit more up and down with the commodity.

You've also targeted a mid-single-digit revenue growth over time, basically. You will be a little ahead of that this year because of the price that's coming through. But when you think about that mid-single-digit target, how much of that eventually will be sort of a volume mix-driven piece given what you're doing relative to the price side of that?

So I think a lot of it might be price this year, but it's also volume based on some of the new products that we're launching. So as you think about these products coming online, now and into the rest of the year, that is part of the growth for this year, which accelerates that number. But they have a multiyear tail on them. So even though we're starting with Auraline this year, you'll see that continue to grow at significant rates into the future. Likewise, the entry door system business, that's been growing at double digits -- high double-digit numbers for a while for the last 12 months or so. And we'll continue as we add capacity. VPI is going to double its size. So things like that. And then we've got more in the pipeline that's going to come and layer on top of that. So that's all volume mix stuff that's going to be favorable.

Yes. And when you talk to the share gains that you're realizing out there, who do you think you're taking share from? And how sustainable do you think that is?

Listen, I'm not going to talk about names or anything like that, but I think that one of the great things that we look at is solving customer problems. So you look at the entry door business that we talked about, solving that problem of -- looking at what is the -- asking the right question to a channel partner, to a customer, what's the biggest problem you're trying to solve, not necessarily related to doors or windows. Particularly their biggest problem at the time was having enough skilled labor to install something and the logistics around getting product from one place to another, we looked at solving those problems with our entry door system. There's a wide-open space for us in the composite window and patio door business. It's a great sustainable product. It's a product people want. It gives them the benefit, the looks and the feel and the capabilities of wood products with all the benefits of vinyl in a sustainable product. Who doesn't want that, right? You're opening up a new space, and we're giving them a great price point, great, great space. Those are the kinds of things that we're looking at. And so they're not only about gaining -- we gain share of the market, but we're also increasing the size of the market by doing those kind of things.

And as you think about some of these growth initiatives, the business has sort of stepped away from some of the M&A that it had done in the past. Do you think you're ready to start doing a little bit more M&A again? And how do you think about what the ideal targets are for you?

So yes, absolutely. We look at -- we -- the last thing we did was the VPI business, which is great. What a great addition to the company, with a strategy to expand that on a national level here in North America -- in the U.S. And we're doing really well with that. It's been a great acquisition. And we're going to be that targeted in looking at things. But as we said at our Investor Day last year, really 2 great opportunities for us that we look at are expanding our windows business in North America and also looking at our European business, both from a geographic and capability standpoint.

Yes. And we haven't talked much about your international business as we sort of really focused a lot on North America. But tell us a little bit about what is going on in Europe and what you're seeing there, especially with all the macro situations.

Yes. So Europe's interesting. The -- it had been a good strong market for it. It's a great business for us. We really like what we're doing there. We have an opportunity, we believe, to expand our pan-European approach to Europe from what was a collection of disparate European businesses. So we're continuing that progress. In the short term, the war in the Ukraine put some headwinds, particularly in our North Europe business, where we saw some project business getting pushed out, and we saw a little bit of destocking on the retail side. So we're watching that closely. But there's some really robust markets in Europe that we really like and are continuing to grow and to continue to perform right now. So we'll watch that very closely. Inflation hit Europe pretty hard, particularly on the utility side. And we've been able to get price, and we'll be watching that very, very closely.

As you look out, is there the opportunity to take some of these new product introductions that you're putting into the North America business to some of these other markets over time? Can you sort of leverage some of this spend in terms of new product developments?

So absolutely. And in fact, what I didn't say in Europe is we've got some innovation going on there. And we have -- so for example, our smart door work is all being done in Europe. This is integrated smart componentry in the door. And it's a true JELD-WEN door, which is really, really cool. And it kind of takes all the mechanism part out of worrying about a smart door, and we're selling that now on there. But that becomes the impetus for a product that we actually will be selling around the globe. Likewise, I believe, I know that our composite will find its way certainly in the Australasian market for sure, in the more shorter term, and will find its way into Europe as well. So yes, we're doing innovation in all 3 segments, and we're cross-pollinating that innovation everywhere.

And Australia or Australasia has obviously seen some -- the macro there has been a little different than what we see here.

Yes. We got a great business down there that, I think you're right, a lot of people don't recognize. Our -- Australia was in a 2-, 2.5-year housing recession. Still a great business. It's now coming out of that. COVID lockdown, some of the hardest ones in the world. And then they had a little bit of weather problems. So the demand for housing in Australia, last year was a record year for new housing sales. The backlog on completions is really high, like 12 months out. And so we believe that they're maybe just a little bit behind the rest of the world on ensuring that they've got enough labor for contractors and builders, but we've got high demand for our products. And we know that they're going to be called off just as soon as that's going on. We're seeing a robust growth going on there. And I think that's going to land for a couple of years now as they come out of that recession and that pent-up demand for new homes. The R&R business continues to be pretty strong, too. And that's been an area that we've been growing our business.

Yes, you've done a lot on the R&R side down there and really sort of expanded your reach within that over the last several years, it seems.

Yes, we -- our business there was a little -- is a little more indexed towards residential new construction, and we've been building the R&R piece out bigger. And we've done a great job there. I mean if you're selling the products into new construction, it's not as difficult or far leap to work in the R&R space as well.

Yes. We talked a little bit about capital allocation around working capital and some of those things in M&A. But how do you think about other uses of capital? You bought back some stock in the first quarter. How are you thinking about some of those things?

Well, I mean, we continue to believe that investing in ourselves is a great investment, and we're going to continue to do that. Particularly at the levels we're at right now, I mean, it makes a lot of sense. So we'll continue to opportunistically buy our own shares. We've got a lot of internal projects that are -- continue to be great delivery. We talked about those. And we're going to look at M&A to accelerate our strategy that we talked about at Investor Day. And that's probably something that becomes a little more in focus for us.

Yes. And obviously, the year got a little bit of a slower start to it for you because of COVID and some of those headwinds that have come through from a macro perspective. But you maintained your EBITDA guidance for the year, right? Talk about that sort of sequential improvement that you're thinking about.

It's all the things we talked about. For us, the miss -- our internal miss was not as significant as what the external miss looked like. So we were within -- we didn't dig a hole. And -- so yes, there were some issues in Australia based on -- some revenue issues based on the weather. And then, of course, the same in Europe for the war and then inflation. We've now priced that inflation. So that certainly supports the rest of the year. We've got price for that. And then we've got all these unique -- we think the margins are still relatively strong. And we've got these unique, the JELD-WEN growth initiatives that we talked about that are going to continue to deliver. So the way we look at the year from the way we came in, other than inflation and price, which we've covered, all the rest still is there to execute. And we're able to still look at our rationalization and modernization work. And we can pull things in, if we need to, and we're continuing down that path.

Yes. As you sort of think out -- look out and think about the sort of environment that we're in, what do you see as sort of the key risks that are out there today? And how has it changed?

I think the -- there's always risk. There's more inflation could happen. We want to look at the housing markets and make sure that they stay strong. We think the underlying -- what's driving housing, particularly in North America is sustainable. The -- I've kind of coined my own phrase called the 3Ms. People are buying -- the people that are buying homes right now are people that are migrating from higher-cost areas to lower-cost areas, not really interest rate specific. They're looking at their payment, they've got money in their pocket, they got equity, they're able to sell their home. If they can find a home in a new market, it's usually something bigger and more affordable. That's happening across the country. We're seeing people move up. And if they can't move up because of -- because there isn't housing stock to move into, they're adding on or they're remodeling. And those are high-ticket items that benefit businesses like ours. And then the third people is people, what I call moving out, which is rent's getting high. And there's this whole generation now, I think, the millennials, we call them, who are starting to figure out that why pay that rent when I can go get a house. And the houses that they're buying are -- they want the same amenities that they've been renting or that their parents have, right? So they're not really buying the starter homes. They're buying this kind of in-the-middle home somewhere between a starter home with more amenities. So it's really kind of playing nicely for the businesses that we are. And I think given the dynamics of -- the demographics and the -- where our housing stocks are today I think that demand is going to continue.

Yes. And you've got some nice product introductions that kind of fit well with that whole shift that allow you to really work with those customers to get there. Perfect. All right. Good. Well, I think we're just about out of time.

Wow, that's awesome.

Look at that. So I guess we'll end it there. Thank you very much.

Thank you. Thanks for having us.

Yes, of course. Of course, we're happy to have you.

All right, I appreciate it.

Okay.